Pretty much every business will go through times when they don’t have the income to match their expenses. If your business is going through the mire of cash flow problem, getting control back can seem impossible. Knowing how to deal with it can make the difference between failure or success.
If handled correctly a cash flow problem can be a short lived issue. Indeed for many businesses it can get rid of a lot of excess baggage and make for a more profitable long term business.
The source of most cash flow problems falls into three categories (or more usually a mix of the three):
Too high costs
Low sales figures
Poor payers
Taking Stock
Before considering what the solutions are to your problems, it is important to get a handle on what the financial scenario actually is, this will give you the figures you need to work out the solution.
What are we trying to do here is get an idea of which elements of your business are working and focus on replicating those. Then remove the elements of your business which are not creating a profit.
Many people with advise making a list of your income and expenditure from your books. This tends not to give a feel for where your costs actually are, there will be many costs that end up filed under ‘miscellaneous’, which doesn’t help. We find it better to go through your bank statements for the past 3 months (boring I know, but it really doesn’t take as long as you may think). List all your actually expenses, remember to include the ones that you have paid for personally – including fuel. This will give you a concrete idea of where you are spending money.
Now look at your income and expenditure. Where did your money come from, where did it go? Go through your bank statements for the last 3 months again, and create a list of transactions. Divide all your transactions up by client, account or contract (how you do this will depend on how your business runs).
There will be expenses you can’t allocate to a contract.
These expenses need to be justified. Be harsh – are they really necessary, how have they contributed to your businesses turnover? If you got rid of them today, what difference would it make to your profit. I know this can seem cold, but that is what necessary when you have a cash flow issue.
Try removing those costs from your business model.
What you are trying to do is get an idea of the profitability of each of your pricing model. Calculate the profitability of each contract now based on the preliminary figures we have (don’t worry about the expenses you can’t allocate as they would have an equal impact on all accounts).
If most of your contracts are not profitable (as rule of thumb – you want more than 75% to be profitable), then the problem lies with your pricing model or your sales figures (or a mixture of both).
Recognising low sales figures is the easy issue to spot. How much time do you have free each week? If you have time free then you could be taking on more contracts, working out how many more contracts you could fit in will give you an idea how much more money you could make if your were working full time.
To solve this you need to look at your marketing.
If you have no free time, then it’s down to your pricing model. You basically need to increase your prices, to work out by how much is fairly simple:
- Add up all your income,
- divide this into the unallocated expenses,
- multiply by 1.25.
This now give you the multiplier for your income. You need to increase quotes by this amount to stay in the black.
You should now be able to identify the cause of your cash flow problems, and work out a solution. Of course, for most businesses they need to increase their prices a little and increase their sales a bit whilst decreasing their costs – but hey, that’s business for you.
